The VAT effect

Come April 2005, India will implement the Value Added Tax (VAT). So far VAT
looks good, in theory, but how much of it can actually be practiced is to be
seen. The Union finance minister, P Chidambaram, has been strongly advocating
the merits of VAT, citing examples of the 130 countries of the world that have
gone the VAT way and have derived measurable benefits.

While impact of VAT would be all pervasive, let us try and figure out the
ramifications on the PC industry. Quips S Rajendran, general manager sales and
marketing, consumer products group, Acer, "VAT would be good for the
industry as it will reduce the cost of manufacturing and hence enable companies
to be more competitive. However, VAT laws are state specific and the draft
legislations may vary from state to state. Hence, the effect of VAT laws would
have to be evaluated after all the State VAT Acts become available."

What to expect?

Notwithstanding the kind of VAT laws that will come into play, on the PC
front, more impact would be felt by the assembler segment, which by and large
evades the taxes. Post VAT, the unorganized PC sector players have to streamline
their accounting, which will bring parity in the market in terms of pricing, and
the unfair price advantage being enjoyed by the assemblers would come to an end.
Meanwhile, accounting transparency will also bring in lots of financial
discipline on the channel players and unethical resellers would be eased out of
the market Says Rajendran, "In a VAT scenario, with manufacturers allowed
to take input credit, the cost advantage to the gray market operators should
cease to exist. Hence, the price advantage of the gray market operators would be
lost on account of the tax and the branded players would be able to offer the
product at much more competitive prices."

The one major impact of VAT would be the level playing field it creates in
the industry, but the VAT rate of 12.5% advocated, has to be uniform. Since
states have a say in fixing the final VAT rate, how far that will happen is
anybody's guess. The co-existence of central sales Tax (CST) alongside VAT
also makes the post VAT regime complex. Many in the industry aver that CST
should be phased out at the earliest. Hence, the AMJ 2005 quarter would be a key
period for PC manufacturers, going by the premise that PC prices might fall by
6-8%.

The IT opportunity

Irrespective of the price upsets post April 2005, the implementation of VAT
and its success lies in the automation of the tax processes. Both the IT
services segment and the PC manufacturers are bound to benefit in terms of fresh
buying that will happen by state governments for automation. According to
industry sources, ICICI Infotech is keenly looking at tax systems automation and
it seems some of the state governments are talking with the company. Other
vendors will also follow suit and, due to this, overall IT adoption levels in
the government is bound to increase. In all, the coming of VAT surely impacts
end user price points but, at the same time, opens up whole new opportunities.

Shrikanth G in
Chennai